Should Landlords Incorporate?
To incorporate or not to incorporate? Small business owners in every industry ask themselves this question. When it comes to landlords, it really comes down to
whether the benefits of incorporation are worth the cost.
Forming a corporation or a limited liability company (LLC) involves paperwork and money. However running things as a sole proprietorship can expose you to some potentially tricky liability and tax questions. Only you know which option is right for you.
If you haven't started your business yet, you can complete business formation documents from home with
simple, DIY options customized for your state.
Benefits of Incorporating: Personal Liability
Maybe you've heard of the term "
corporate person"? A corporation is, legally speaking, a separate entity from its owner. And many of the benefits of incorporation flow from a corporation's sense of personhood.
Corporations
have limited liability protection for their torts. This means lawsuits are directed at the company rather than individual property owners. Your personal assets, like money, can’t be attacked in a lawsuit.
For example, when someone slips and falls and suffers injury, it's the premises' owner that gets sued. If you're incorporated, the corporation gets sued, and you have no personal liability in the matter.
Benefits of Incorporating: Tax Purposes
Tax benefits exist too. Your personal income tax is a certain rate, while corporations are taxed at corporate tax rates. Your bank account could see a hefty difference when you pay taxes and receive your tax returns.
And there are differences in the form of taxable income and deductions and credits available from federal, state, and local governments. You need to consider how to best handle your rental income and if tax savings are possible.
Property Management: Whether Incorporation Is Worth It
Here's a good question to ask. Are you looking to rent something out or run a business? Are you getting into real estate investing? Are you purchasing multiple investment properties? The answer should be a good indicator of whether landlord incorporation is right for you.
Forming an LLC or a corporation is more common for professional realtors and developers. Incorporation can make sense to help handle:
- Construction and repair costs
- Maintenance costs
- Employee management
- Potentially greater liability concerns
What Does Incorporation Involve?
Incorporation involves paying for lawyers to form a legal entity — or
using online forms to do this yourself. Afterward, you need to observe corporate formalities and run yourself as a business.
Now if that scares the bejesus out of you then incorporation probably isn't worth it. Empty nesters and second-home owners looking for some extra income likely aren't up to that kind of time and energy.
On the other hand,
corporations have perpetual life, meaning they continue on, and on and on. That might be attractive to some homeowners.
Related Resources:
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.
